1. Prior to creating your backup set, go Manage>Agents>SQL Agent and Edit Server List. Here you will add the SQL server to the Saved Server list. The server will be added as "ServerName"^"InstanceName" to the saved server list.

2. The type of backup you do will depend upon the version of SQL you are using.
- SQL 2000: NamedPipe
- SQL 2005: VDI
- SQL 2008: Volume Shadow Copy